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Question
Suppose the Fed has set the federal funds rate at 4.5 percent using the Taylor rule. If the inflation rate increases by1 percentage point and the weight on inflation gap is 0.5, all other variables remain unchanged, the federal funds rate should
a. decrease to 3.5 percent.
b. decrease to 4 percent.
c. increase to 5.5 percent.
d. increase to 5 percent.
Answer
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